Non-resident, non-domiciled people are only subject to IHT on their UK assets. The current threshold is £325,000 after deduction of liabilities such as mortgages, and tax is payable at 40% on the excess. Most property portfolios owned by overseas residents exceed this value; therefore planning should be put in place to mitigate the liability.
There are a myriad of ways to do this, from gifting strategies to complicated Trust Structures but what is often overlooked is the straightforward use of insurance. Here are three ways you can leverage insurance to reduce your Inheritance Tax Liability.
- Take out a Life insurance policy that pays the IHT liability on the insured’s death. In this way the property does not have to be sold to pay the IHT and the estate is preserved for the insured’s successors.Simple life insurance is normally on a term basis, which sets a value on the amount insured for a specified period. The insured amount is usually the potential IHT liability, but there are two drawbacks – the IHT liability is likely to increase over time as the property value goes up and the mortgage goes down, and the insured may not die in the specified time.
- Take out a Whole of Life Insurance Policy or a Universal Life Insurance Policy. Unlike term insurance, which is limited to a set period, these policies never run out. So long as you continue to pay the premiums, the payout when you die is guaranteed. However, because the promise is open-ended, the premiums are significantly higher, particularly for older policyholders.Some policies have the flexibility to increase or decrease coverage, and therefore premiums, as life circumstances change and even have residual values that are paid to policyholders if they want to cash in the policy.
- Combine gifting with insurance. In this scenario the owner gives away the property whilst living. IHT may not be immediately extinguished because, if the donor dies within seven years of the gift there could still be an IHT liability, as most gifts are deemed “Potentially Exempt Transfers” (PETs) for those seven years.
The good news is that the more time that passes, the less tax is due (as the tax due on a PET reduces, or is 'tapered,' over the 7-year period). To provide for this eventuality a 7-year decreasing-term policy is a good and, equally important, cheap way to cover this potential IHT liability. As the name suggests, the amount insured and associated premiums decreases over the 7 years – however, the major drawback is that the property has to be given away.
The simple process is therefore to establish any potential liability and get quotes for the various options before making any decisions. It is vital that whichever type of policy is chosen it is written in trust and therefore the proceeds are outside the insured’s estate, otherwise IHT will be payable on the insurance proceeds defeating the object of planning.
Every family has different circumstances and each individual has different needs. If you have an IHT liability and want to explore the details associated with your special case, feel free to contact me to discuss which plan best suits your case.
Follow Neil on Twitter @neilstokes_hk or email him at Neil@justservicehk.com
Just Service Hong Kong is a member of the Hong Kong Confederation of Insurance Brokers in Hong Kong, transacting Long Term (including linked long term) Insurance business. Nothing in the comments above should be taken as offering investment advice or making an offer of any kind with regard to financial products or services of any kind. It is therefore important to reinforce that all comments above are designed to be general in nature and should not be relied upon for considering investment decisions without talking to licensed advisers.